Services industry contracts a sixth month in September

Monday 20th October 2008

New Zealand's services industry contracted for a sixth month in September, on weak activity and sales. The September reading was the second-lowest on record.

The Bank of New Zealand - Business NZ Performance of Service Index (PSI) slipped to 46.9 in September, from 47.9 in August. It reached a record low of 45.6 in June. A reading below 50 indicates a contraction.

The shrinkage in the services industry adds to the case for the central bank to cut the official cash rate 100 basis points this week to bolster an economy that risks chalking up four consecutive quarters of recession. Government figures today showed growth in consumer spending on debit and credit cards stalled in September and fell 0.4% excluding fuel and auto-related spending. Spending on clothing and household appliance paced the decline.

"The Reserve Bank now has the green light to push interest rates aggressively downward," said Stephen Toplis, head of research at BNZ. Still, the difficulty banks have in souring funding means there's a large effective spread between the OCR and effective cash rates banks are lending at, he said.

Inflation, which probably peaked at an annual rate of 5.1% in the third quarter, is now set to slow to within the central bank's 1% to 3% band, Bank of New Zealand said.

The PSI for September shows four of the five diffusion indexes contracted last month. Employment was at 45.8, new orders were at 49.4 and supplier deliveries were 45.6. Stocks and inventories expanded, with a reading of 53.

By Jonathan Underhill

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